Tag Archives: Inheritance tax

The Law Society of South Africa aims to give back to the general public through various initiatives, one being the annual NATIONAL FREE WILLS WEEK. This year the FREE WILLS WEEK will be running countrywide from 7-11 October 2013.

During this week, participating attorneys will draft basic wills free of charge. However, only a new basic will be drafted. This initiative does not extend to amendments to existing wills.

The office of Oosthuizen & Co Meyer de Waal Inc. is a proud participant in this initiative.

If you do not already have a valid Will in place, we invite you to contact Samantha at our offices on 021 461 0065 and set up an appointment to make your Will.

Wondering why it is important to have a valid Will? Here are but a few reasons why it is essential to have a valid Will:

1. It is the only way in which you can ensure that your estate will be divided according to your wishes after your death.

2. If you do not have a valid will in place when you die, your estate will simply devolve according to the intestate rules of succession, which can be both inflexible and impractical. You will have no control as to who will inherit from your estate, with the result that the wrong person(s) may receive a portion/benefit from your estate. There are also many rules and regulations that need to be adhered to, which may further delay the administration of your estate and run up unnecessary costs.

3. In your will you have the opportunity to nominate an Executor to take control of your affairs once you pass away. The role of the Executor is to protect your assets, settle your debts, identify your heirs and distribute your assets in line with your will, a process that is overseen by the Master of the High Court. This role can be fulfilled by any adult person whom you trust, whether it is your spouse, major child, friend or a professional person such as an attorney or accountant.

It is advisable that you nominate an alternative (second) Executor, providing for the situation where your first nominated Executor is not willing or able to perform the duties of an Executor at the time of your death.

Furthermore, it is advised that you stipulate the executor’s fees as agreed to by yourself and the nominated Executor as this fee may be quite substantial, depending on the value of your estate.

4. If you have not appointed an Executor, your beneficiaries will have to decide and agree on a nomination and submit same in writing to the Master of the High Court, who has the final discretion in accepting the beneficiaries’ nomination and/or requiring the addition of an agent to assist the nominated Executor. This route will delay the winding-up of your estate considerably, especially if the Master does not accept one/more of the beneficiaries’ nominations.

In addition hereto, the Master may require that the Executor, appointed as set out above, provides security for the estate’s debt. Such security will normally take on the form of a security bond from a short term insurance company for the value of the assets reflecting in the preliminary inventory submitted to the Master. This will cause great and unfortunate inconvenience for the nominated Executor. A well drafted will usually contains a clause specifically exempting the nominated executor from having to furnish security.

5. By having your will drafted clearly and unambiguously, you will prevent a situation of heirs squabbling about who gets what. Disputes about the estate’s assets and debts frustrate and delay the administration process. In addition hereto, existing relationships between heirs may take a terrible, even permanent, blow.

6. Should you pass away without a will and you leave minor children behind, their inheritance, in terms of the rules of intestate succession, must be paid into the Guardian’s Fund until they reach majority. A downside to this happening is that the interest rate on the investment may be low. A further difficulty is that, should you leave behind a valuable property, the surviving spouse and/or major children may be forced to sell the property in order to raise the necessary funds to be transferred into the Guardian’s Fund on the minor child’s behalf.

This situation can easily be avoided by making provision for a testamentary trust in your will into which all assets inherited by a minor child will be transferred and kept until he/she reaches majority or an older age you may stipulate in your will.

7. For the more sophisticated planner, a valid will can be used as an effective tax planning tool. With the assistance of a professional/expert, you can legally structure your portfolio and draft your will in such a way as to minimize your estate duty liability upon death. Estate duty is payable from the residue of your estate, which is the portion that is left after all legacies and bequests have been paid out. Should the estate duty payable on your estate by unnecessarily high, the heir(s) inheriting the residue, will receive less than you might have intended.

Taking into account the knowledge and experience required to draft a will properly, it is definitely advised to have your will drafted by an attorney or similarly qualified professional.

The days of estate duty may be numbered according to Nicolene Schoeman of Schoeman Attorneys and an article by Barry Ger, Cape Town-based tax consultant, in the May issue of De Rebus, the SA attorneys’ journal published by the Law Society of South Africa (LSSA). His opinion is echoed by several other media reports. In fact, many people’s hopes that this tax was finally on its way out rose significantly during this year’s budget speech.

Estate duty: brief background

Imposed in terms of the Estate Duty Act 45 of 1955 as amended, estate duty is a tax levied at 20%. It is payable in respect of all property (and property deemed to be property) held by a deceased person at the date of his or her death.

In respect of property deemed to be property, the law denotes that even property not actually held by the deceased at death – in other words: some insurance policies – are also deemed to be included in his or her estate as part of the dutiable amount on which the tax is raised.

The tax is subject to a R3 500 000.00 exemption or abatement, which can be increased to R7 000 000.00 if the deceased person was predeceased by a spouse who did not use their abatement.

Ironically, writes Ger, wealthy people are reluctant to pay this tax even with their substantial means. They often engage in expensive and elaborate ownership structures to avoid it. As a result, estate duty contributes a relatively small amount of revenue to the fiscus through SARS and the costs involved in collecting estate duty are high.

Ger also states that he thinks this is the reason behind proposals to abolish the tax. Estate duty presents a number of other problems. For example:

Assets owned by a deceased person in an offshore jurisdiction could be subject to local estate duty as well as any other duty imposed in the foreign country

Assets that form part of the dutiable estate compromise income or assets already subjected to income tax during the deceased person’s lifetime

For these reasons, the fiscus is considering a new inheritance tax that is common to some other jurisdictions. Alternatively, it will make certain amendments to the CGT provisions. These are still rather unclear and, at this point, amount to little more than speculation.

Therefore, clients are urged to consult suitably qualified attorneys for advice on appropriate estate planning strategies and updates on any relevant developments.

Please take note that it is of the utmost importance that any estate planning strategy is implemented with a legally valid and updated will.

Gerrie Vosser examines the tax and costs related to different scenarios in order to determine whether it is still a feasible option to hold fixed property in a trust.

For many years the high transfer duty rate applying to trusts made it less attractive to purchase fixed properties in trust, a situation that changed, quite unexpectedly, for the better when on 23 February 2011 the transfer duty rate for trusts was adjusted downwards to the same more favourable rate as those for natural persons. However, just as unexpectedly, in the 2012 budget capital gains tax (CGT) inclusion rates were increased, resulting in trusts now being exposed to a maximum effective CGT rate of 26.7% compared to those of 18.6% and 13.3% for private companies and private individuals respectively.

Concerns have subsequently been raised that ownership of fixed property in trust as a way to create, protect, utilise and transfer wealth may have been dealt a crippling blow. However, these concerns turn out to be unjustified when various fixed property ownership options are analysed from an integrated, multi-disciplinary point of view.

Optimal ownership of investment property

Consider the example of an investment property, fully paid, currently worth R 1 000 000 (use this as base cost for CGT) with a projected annual capital growth rate of 10% and a current annual rental income of R 72 000 (net of cost). The following comparative tax and cost analysis of various ownership options shows a trust to be the optimal ownership choice:

Personal ownership

Property owned by Joe Bloggs, successful business person and subject to an income tax rate of 40%, married out of community of property to Jill, an unemployed housewife, with two children approaching their teens and Jill’s mother financially dependent on the Bloggs. (Even without the investment property of R 1 000 000, the net value of Joe and Jill’s combined estate and life assurance already exceeds R 7 000 000.)

Using the conduit principle, trust gross income is distributed to two non-income earning Bloggs family members resulting in no income tax having to be paid. A trust is the best option again.

Scenario four: Liquidation of property after 10 years during Joe’s lifetime

Capital gains tax

Dividend tax @ 15%

R 207 972

NA

R 296 428

R 344 591

R 42 573

NA

Total expense

R 207 972

R 641 019

R 42 573

Again, using the conduit principle with trust gross income distributed to four non-income earning Bloggs family members, there is a total CGT liability of only R 42 573. A trust, yet again, proves the best option. (The effects on the personal estates of the beneficiaries need to be carefully considered and managed.)

In suitable circumstances and from a tax and cost point of view, a properly structured and professionally used discretionary trust without doubt still provides the optimal ownership solution for an investment property.

Remember however that tax benefits should never be the primary reason for establishing and using a trust. Tax legislation may change for the worse; and personal circumstances may change and neutralise potential tax benefits. Remember too that the planning, drafting and upgrading of trust deeds, as well as the management and administration of trusts requires multi-disciplinary professional skills. Members of the public are advised to seek out a practitioner who is a member of the Fiduciary Institute of South Africa (FISA), who are bound by a code of ethics to adhere to a high professional standard.